Slower Growth and Market Returns in 2019

As we head into 2019, equity markets are pricing in a decidedly pessimistic outlook with regards to the global economy and the pace of growth in corporate profits.

The market’s pessimism is a by-product of the following factors:

Weaker economic activity, which has thus far been focused in non-U.S. geographies, particularly in Europe and China.

Escalating trade tension between the U.S. and its key trading partners, particularly China.

Concern that the U.S. Federal Reserve’s monetary tightening path is too aggressive, given the deterioration in forward growth expectations.

The economic cycle is extended.

While we acknowledge the pace of growth is likely to slow in 2019, we do not believe recession is lurking around the corner. We also believe that the abrupt and broad-based sell-off in equity markets has created opportunities to invest in great companies at attractive valuations that are likely to continue to be successful, even as the overall pace of growth moderates.

In my latest video, I outline these issues in more detail and discuss why we believe the market’s fears might be overblown.

Brent Puff

Transcript

Market expectations are low. There's an extraordinary amount of pessimism in the market. I think it's going to take very little positive news on the economic front or the trade front to improve the outlook for equities.

Equity market returns around the world continue to be driven really by three principle fears. The first fear is concern that the U.S. Fed is going to make a policy misstep. In other words, tighten too much into what is a slowing global economy. The second fear that dominated equity markets as we exited 2018 was concern that the US and Chinese trade dispute will continue to escalate, and finally the third fear in the marketplace that has contributed to difficult markets is concern that the economic and corporate profit cycle is mature, slowing down, and the risk of recession is growing looking forward.

Our perspective on those three fears is as follows. First, the risk of Fed policy error in our opinion is overplayed. The Fed is a data-dependent organization. They will adjust policy as the information changes.

On the trade front, we believe trade is probably the single biggest risk as it relates to equity markets in 2019. It's our view that the likelihood of a trade deal is higher than the prospects for a protracted escalation in tariffs in 2019.

And in regards to the third fear, i.e. that economic and corporate profit growth is slowing, that is indeed the case. But importantly, we do not believe the global economy or the corporate profit cycle is going into a downturn. We simply believe that the pace of growth is slowing. In that environment, we think equity returns can continue to be favorable.

I think there's no question there's been somewhat of a disconnect between operating fundamentals and equity performance. The most telling example of that is that valuations around the world have compressed very materially. Corporate profits grew at a relatively robust pace in 2018, and yet equity returns around the world were generally under a lot of pressure. So, stock markets and stock valuations are cheaper today than they were a year ago—and in certain markets like the U.S., materially cheaper than they were a year ago. That's actually a healthy starting point for the market in 2019.

Despite a disjointed and volatile economic backdrop, Portfolio Manager Brent Puff remains optimistic on the 2019 outlook for equities. One issue, however, did surprise him in the third quarter of 2018.

October 31, 2018

Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.

The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.

References to specific securities are for illustrative purposes only, and are not intended as recommendations to purchase or sell securities. Opinions and estimates offered constitute our judgment and, along with other portfolio data, are subject to change without notice.

Diversification does not assure a profit nor does it protect against loss of principal.

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